Public Audit and Post-legislative Scrutiny Committee

Meeting date: Thursday, January 11, 2018

Official Report 527KB pdf

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“The administration of the Scottish Rate of Income Tax 2016-17”

Agenda item 4 is evidence taking on the administration of the Scottish rate of income tax in 2016-17. I welcome to the committee Caroline Gardner, Auditor General for Scotland, and Mark Taylor, assistant director, Audit Scotland. I also welcome Sir Amyas Morse, Comptroller and Auditor General, and John Thorpe, executive leader, National Audit Office.

I invite opening statements from Caroline Gardner, followed by Sir Amyas.

Thank you, convener. I will keep it brief.

As we have been discussing, income tax is a major part of the package of new financial powers that are being implemented as a result of the 2012 and 2016 Scotland acts. Taken together, those powers are substantially changing Scotland’s public finances.

The reports that are before the committee today relate to the Scottish rate of income tax in 2016-17, following its introduction in April 2016. In considering the reports, it is important to bear in mind the respective responsibilities of those involved.

Her Majesty’s Revenue and Customs administers and collects Scottish income tax as part of the United Kingdom’s overall income tax system, and is responsible for developing and maintaining the systems that are needed to implement decisions that are taken by the Scottish Parliament on rates and bands. The Scottish Government funds that by reimbursing the costs of administering and collecting Scottish income tax. The Scottish Government also seeks assurances that the system collects the correct amount of tax and that this is brought to account.

The National Audit Office audits HMRC’s accounts, and the Comptroller and Auditor General is responsible for reporting to the Scottish Parliament on HMRC’s administration of Scottish income tax. I provide the committee with additional assurance on the NAO’s audit work, in line with a recommendation from the then Public Audit Committee in 2014. This is the third year of that arrangement.

In summary, my report confirms that I am satisfied that the NAO’s audit approach was sufficient and robust, and covered the key audit risks. I am also satisfied that the findings and conclusions in the C and AG’s report are reasonably based.

The Scottish Parliament now has the power to set the income tax rates and bands for non-savings, non-dividend income for Scottish taxpayers, which means that the Scottish rate of income tax arrangements were only in place for a single year. Nonetheless, the underlying administration arrangements that operated in 2016-17, particularly the accurate identification of Scottish taxpayers, remain fundamental to the effective operation of the new, wider Scottish income tax powers.

I will hand over to the C and AG to introduce his report.

Thank you very much, convener, for inviting me. My colleague and I are delighted to be here.

The Auditor General for Scotland has set out HMRC’s responsibilities for the collection and administration of Scottish income tax, and she has spoken about our respective responsibilities, so I will not repeat those comments. However, it is probably worth saying that my role is just the same as hers, but in relation to the UK Parliament.

Under the legislation, we are required to report on the adequacy of the rules and procedures that HMRC has put in place in consequence of the Scottish rate provisions, for the purpose of ensuring that the proper assessment and collection is undertaken of income tax that is charged at rates that are determined under those provisions.

We are obliged to comment on whether those rules and procedures are being complied with; the correctness of the sums brought to account by HMRC that relate to income tax and which are attributable to the Scottish rate resolution; and the accuracy and fairness of the amounts that are reimbursed to HMRC as administrative expenses that have been incurred as a result of the charging of the Scottish rate of income tax.

The report is for 2016-17, and it is fair to say that there is probably quite a lot more to come next year. The report is on the first year of HMRC’s administration of the Scottish rate, which, as you know, went live in April 2016. The key findings are set out in paragraphs 9 to 19 of the report and my conclusion on page 10. In previous years, we have highlighted the importance of HMRC keeping its information on the Scottish taxpayer population up to date, and HMRC has now taken steps to improve the validation of who are, and who should be, Scottish taxpayers. However, it is still the case that the identification of the tax base is fundamental to the effective operation of Scottish income tax, and it is an area that we will continue to examine and push on in future years. Although things have improved, we are not saying that the destination has been reached, and I am quite sure that members will want to ask questions about change of address and so forth.

On the correctness of the sums brought to account, the committee will appreciate that the final outturn for 2016-17 will not be reported until HMRC presents its annual report and accounts in July 2018. I will report to the committee in greater detail in my next report, once I have had the opportunity to examine the sums brought to account.

I thank the Auditor General and Audit Scotland. We have worked very well together, as we always do, but I am very grateful for all the co-operation and close working as we have done our work.

Thank you for those helpful opening statements. Alex Neil will ask the first question.

I have two questions. This is the first year of operation of the Scottish rate, and in the recent Scottish budget, the Cabinet Secretary for Finance and the Constitution put forward proposals for an increase in the number of income tax bands, which will result in a number of people in the lower-income groups having their income tax bill reduced. However, it will also result in a number of people in higher-income groups having their income tax bill increased.

Under the current arrangements, what scope is there for people—particularly those in higher-income groups—to dodge the higher rates of income tax in Scotland?

I am not being evasive when I say that I think you could also have a very useful discussion about that with HMRC, which is on point for it. The more difference there is between rates of tax in Scotland and rates of tax in England, the more potential inducement there is to engage in avoidance.

I go back to what I said: it is crucial to identify Scottish taxpayers. We think that the systems environment and the systems arrangements in HMRC—which I will ask my colleague John Thorpe to say more about, because he certainly knows more about them than I do—should be perfectly adequate to enable it to compute the different rates of tax accurately if it has the right data about who the taxpayers are. As you know, there is a continuing question about change of address and so forth.

The view is that the differential in tax rates creates pressure on the system, but it is not axiomatic that that pressure cannot be managed.

I will develop that point. The national insurance and PAYE service system, which was introduced in HMRC in 2010, consolidated tax records on individuals. That was a big step forward. Each year, it is normal for HMRC to make amendments to the code and the system in order to deal with tax or budget events. The implementation of those changes goes through significant testing both prior to implementation and post-implementation, and that is a key focus for our audit.

With the implementation of the Scottish rate, we are extending our testing to include people with the relevant Scottish flag to make sure that the requisite testing is done in that area. Provided that Scottish taxpayers are correctly identified, as the C and AG said, we expect the systems and processes to be able to accommodate the change to which you referred.

09:45  

So you think that the systems are already robust enough to identify anyone who tries to dodge tax between Scotland and the rest of the UK.

We think that the department needs to keep looking at that because, as the tax system evolves—

But what about as things stand? I understand that you need to keep that under review, because those guys have all their accountants constantly working on the issue but, as things stand, are the systems sufficiently robust for this year?

The systems were wholly aligned for this year. Change has come through in 2017-18, and greater changes will come through in 2018-19. That changes the environment and the risk profile. We would expect HMRC, as it does, to reassess that risk as part of its normal business. We will look to see how it has done that and what it has concluded.

Right. So you will keep that under constant review, as well.

That is a normal part of our audit for any tax, whether in Scotland or the wider UK.

Okay. I presume that, if you gather evidence that people are deliberately trying to dodge tax and are using the differential between Scotland and the rest of the UK, you will suggest and discuss rectifying measures with HMRC.

Yes, but I have a clarifying comment on that. You mentioned dodging tax. Will you be clear about what we are talking about? If we are talking about tax evasion and people deliberately concealing the fact that they are Scottish residents, that is one question. If somebody is telling lies or deliberately concealing what they are doing, the systems will not necessarily prevent that. We are simply saying to members that the majority of people do not do that. We think that the system is getting better and is now achieving improved, although not perfect, reliability in identifying people who are actually resident in Scotland. However, that issue is different from the issue of whether people are evading tax—that is to say, doing things that are illegal and telling lies—or otherwise.

You also referred to avoidance. That involves people trying to legally arrange things to put themselves outwith the scope of Scottish tax. Frankly, the systems have nothing to say about that.

To be clear, quite a lot of threats could occur in other ways that will not be dealt with by the administration of the Scottish rate of income tax.

You said that the system has nothing to say about avoidance. I am interested in that.

It does not. If somebody comes up with a tax wheeze—if you will forgive the term—in which they say that they used to have a company or used to be resident in Scotland, but now have some way of establishing a credible legal argument with which they are successful that they are actually resident in England, they will be resident in England. That would not astonish me if a big differential in tax rates was involved. The systems will crunch that out.

I am sorry, but I am just being clear that the question is “What is the agreed status?” If there is a significant differential, people who work in London and have a home in Scotland will naturally think about whether there is a way in which they can present themselves as resident in London. That sort of stuff might occur if the differential is great enough, and the systems will not automatically address that. I am just making it clear that that is not their job.

It is also worth noting that non-savings, non-dividend income is devolved to Scotland from 2017-18. Therefore, if people are able to properly reallocate their income from earned income to one of those categories—to savings or dividends—there will be another movement there. That falls very much into the category that my colleague has described to members.

Let me give a practical example. Suppose that I earn £150,000 or £160,000 a year.

Congratulations.

There is no chance in this job, I can tell you.

Let us suppose that I claim that I now live in England and, therefore, pay the lower rate of income tax—I do not pay the new 46p rate in Scotland; I pay the 45p rate that is still the case in England—but, simultaneously, my kids get free tuition or I get free prescriptions in Scotland. Would your systems pick up that contradiction?

They are not my systems. I am the auditor and will stick to doing audit, if that is all right.

Well, are you satisfied—

Let me answer you to inform the committee as best I can.

It would be very relevant for HMRC to examine any sudden transfers of status and data on that. HMRC is getting pretty good at data comparison, so I hope that it would approach oddities in that way. If it is possible to predict any likely threat to tax income, I would expect HMRC to take an intelligent approach to that and it would be great to talk to it about how it would go about that.

Okay. You think that HMRC’s systems are robust enough to pick up and flag up where that might happen.

There are two aspects to that. The systems that we have been talking about are basically tax processing systems. They are the automated processing systems with which all of us come into contact. Layered on top of them is the compliance process, which we have been getting into. On that, HMRC has a choice about where it devotes its resources for examining and cracking down on risks of those types. The C and AG commented on the use of data, and that is where HMRC can use its data to pinpoint such risks and where it has a decision to make about where it devotes its resources.

However, as things stand, the National Audit Office is satisfied that HMRC’s current systems are sufficiently robust at the moment.

Yes, in the automated processing they are, as long as we get the taxpayer address materially correct. The department has learnt a lot in the past 18 months as it has gone through data matching processes to clean and validate the database. In some of the validation, it has perhaps being seeking to validate against data sets that are inferior to its own, which has slowed down the process and required manual intervention. However, it now has that knowledge. How the system works going forward will be important for maintaining and improving the position.

My final question is on a slightly different matter. In evidence yesterday to the Scottish Parliament’s Finance and Constitution Committee, it became obvious that issues are already emerging with the interaction between our powers over income tax and the UK’s residual powers over it. We are responsible only for rates and bands; the UK Treasury is responsible for policy on allowances, reliefs and, as the Auditor General said, income tax on dividends and savings.

The first of the two examples that came up yesterday was that, as a result of the decisions that our Cabinet Secretary for Finance and Constitution has made and the proposals that he has advanced, there is a big issue with whether people in Scotland will be able to get the marriage allowance and at what point in the system they will be able to do that.

The second example concerns the degree of progression in the system. The interaction between allowances and our new bands means that, at middle income—I think that it is £45,000 to £50,000—people pay a greater percentage of income tax than if they earn slightly above that. I might have the figures slightly out, but the principle is that is everything is progressive apart from for that narrow but significant group of people.

The sequence has to be that the UK budget comes before the Scottish budget because, under current arrangements, our budget cannot be set until we know what is in the UK budget. I know that the witnesses are not responsible for policy, but there is a process issue that needs to be addressed in the interaction within the division of powers on income tax and the unintended consequences that have already arisen. Will the Audit Scotland and the National Audit Office consider that?

The answer to that is no, if you will pardon me for saying so. I think that that is a matter that needs to be addressed with HMRC; I do not think that it is within my competence. I do not mean that I would not try to help to inform any conclusions that were being reached, but it is not my job to lead that debate. I am not unsympathetic to what you are talking about—it is just that it is not my business.

Is that your position, too, Auditor General?

It is an issue that we cannot look at, because those sorts of interactions and the anomalies and unintended consequences that you have hinted at are a direct result of the settlement that came out of the Smith commission, the Scotland Act 2016 and the fiscal framework, and it is clear that those are policy matters that are outside my remit. They are very important—as you say, they will affect the timing of the budget and the way in which it is passed, as well as its impact on real people: taxpayers, citizens and service users.

As the new powers begin to be used and we see the full devolution of the VAT provision with the assignment of revenues and start to look at the interaction with the welfare system, there might be a need for the two Parliaments to step back and look again at the way in which they work in practice.

Perhaps the committee should flag up the issue to the Finance and Constitution Committee as one that it might want to address.

We can certainly consider that. Have you finished your questions?

Yes, thank you.

Having looked at the report, I have quite a few questions and quite a few concerns about the accuracy of the Scottish tax base figures. There are a few issues that jump out. Paragraph 1.9 highlights an issue that has already been mentioned, which is that savings and dividends are affected by UK tax laws, whereas the Scottish tax thresholds are under the control of the Scottish Government. It says:

“The Chartered Institute of Taxation and Association of Taxation Technicians told us that this increases the risk of errors in self-assessment income tax.”

The changes that will take place, assuming that the Scottish budget remains as it is, will significantly increase that risk. What steps can be taken to mitigate that?

I am terribly sorry, but I am going to sound a bit like a cracked record. I like to be forthcoming with committees, and I am being as forthcoming as I can be here and I note that what you say is true, but it is for HMRC to talk to you about how it proposes to mitigate that risk. We are talking about how effectively HMRC is administering things: we think that there will be an issue in the future. The question for HMRC is how it expects to mitigate that risk.

Will you continue to monitor that from an audit angle?

We will—absolutely. We have tried to put in our report everything that we think might be relevant to the committee’s consideration. Even if it is not our job to address an issue, we will monitor it and keep you informed on it.

Paragraph 1.11 is about tax codes. I was concerned by the statement:

“HMRC and the Scottish Government have not agreed any minimum period between the finalisation of the Scottish budget and the start of the tax year.”

Is that another risk?

We believe that that is an issue that could give rise to some confusion. Some taxpayers could receive two coding notices within a short space of time, which is not helpful from the taxpayer’s perspective. We will continue to examine implementation of the measures and their incorporation into the tax system. I know that HMRC has looked at that aspect of the administration, partly because the Scottish Government asked it to do so. We will keep the matter under review.

I will move on to the small print. According to a footnote to paragraph 2.13, we are talking about an increase in income tax of £127 million and a deduction of £20 million in respect of a block-grant adjustment. What is that?

That might be a question for Audit Scotland to answer. We were trying to illustrate the fiscal impact of the changes that are being implemented for 2017-18. We have yet to audit that outturn, which is our responsibility. The paragraph simply seeks to illustrate the estimation of the budget impact of the tax changes.

10:00  

That is fine, but what is the £20 million block-grant adjustment? Is it a result of the increase in tax? Is it some sort of clawback?

Mark Taylor can help you with that.

We can write to you on the specifics, but just to give you a feel for what is going on, the net calculation of the £107 million adjustment included a forecast assessment of the difference that the change in the higher-rate threshold would make to tax collection. At the same time, the underlying assessment of the forecast position in relation to tax as a whole was revisited. Those two adjustments were put through at the same time, and that is where the £107 million came from. We can write to the committee with some of the details of that.

Did the Scottish Government budget for £127 million but get only £107 million?

No. The Scottish Government budgeted to get £107 million. The way in which the system operates during the financial year is that that is the amount that is confirmed within the budget.

Okay.

We are talking about risk models. That, of course, is an essential part of HMRC—it lives and dies by the risk assessments that it makes. Paragraph 3.25 states that

“it has adapted its standard risk model to cover Scottish-specific tax risks”.

Given the changes that are taking place within the Scottish tax system, will HMRC have to revisit that model?

Maybe it will, but—I apologise for saying this again—I think that you should ask HMRC about that, because you want to nail down exactly what it is going to do. We did not say that as a criticism; we are simply saying that HMRC has a list of things that it specifically models and a list of things to which it applies a general model. At the moment, it is applying the general model. You want HMRC to move to modelling risk specifically for the SRIT, which will be good from your point of view. You need to have that conversation and move it over the edge. You need to be quite sure about what you will get, against what it might cost. HMRC is charging for this, so I would get an estimate from it at the same time, if I were you.

Convener—I assume that we can have HMRC at committee to pick up some of these points.

I have already noted the need for communication with HMRC. Iain Gray is next.

Alex Neil covered what I was going to ask about.

Okay. Liam Kerr has a question.

I will pick up on what Alex Neil said about residence. It is something that I have been interested in for a while. A Scottish taxpayer is someone who has their main place of residence in Scotland. That is quite a tight definition; it is not extensive. A “place of residence” is somewhere that one resides for at least 183 days, I understand, and one resides there—at least according to tax records—if one self-reports as residing there. It seems to me that it would be rather straightforward, particularly for higher earners, to undertake tax planning in a different way. Am I reading that correctly?

A million years ago, I was a tax partner, so you will hear extremely out-of-date comments here, but I will have a go. The question of where a person’s main residence is, in tax law, is helpfully described as “a matter of fact”. That means that they cannot just say that a place is their main residence for a specific purpose—it has actually to be their main residence. There are a number of indicators that a place is a main residence, to do with permanence and being established.

If a person has a house in Scotland and is working and staying in a flat in London and suddenly decides to say that the flat is their main residence, HMRC has grounds to examine whether that claim is genuine. There is quite a lot of tax law on that, which built up mainly in establishing whether people were resident in the UK for tax purposes. People cannot do whatever they like; it is not like that. There is a body of tax law to test that.

It would not be outwith the realms of possibility for me to base myself in Newcastle for 183 days of the year, as a matter of fact, and to work every day over the border in Scotland while being an English taxpayer. That would be possible.

If you want to use that extreme example, if you had no residence other than the one that was located in England, the only way in which that could be addressed would be through questioning whether there was deliberate avoidance of some kind.

Those are really questions for HMRC and not for me. I am just trying to give you an indicator. One could try to show that a residency that a person has adopted is a sham, but if someone is genuinely prepared to go and live in another country permanently, they will be able to establish residency in that country. You cannot really prevent people from doing that. That is probably all that I can say on the matter.

I will move on to the costs of administering the system. The report shows an administrative cost for last year of £6.3 million, which is, I understand, back-charged to Scotland. The report is fairly clear that that cost is a function of differing tax rates, in the sense that the greater the difference between jurisdictions’ tax rates, the more administrative costs will be back-charged to the Scottish taxpayer.

There was a fairly recent announcement that we are going to have a greater number of tax bands in Scotland. What is the impact on the £6.3 million—or any other administrative charge—of having more tax bands? Is it possible to say that five tax bands will equal £X administrative charge, for example? How much will this cost us?

The proposed changes were announced in the budget, which came after the report, so we have not had a conversation with HMRC to understand the impact or how far HMRC has got in making that assessment. That is a question to put to HMRC. We will audit the costs and ensure that the governance and capturing of those costs are accurately and properly reported.

There are two cost drivers. We talked earlier about the automated processing of returns. The system is geared up to handle that. I imagine that processing a return against an algorithm that is looking at five tax bands will not really be different from doing so against three tax bands because the operations are, effectively, the same.

We talked about divergence, whether from a Scottish decision or a UK decision, that promotes the risk of non-compliance or of behaviours that might lead to people electing to move from Scotland to England or otherwise. There would be an additional cost to that if HMRC decided to ramp that up because the risk profile changed. That would be a cost driver to which the C and AG alluded in an earlier response.

If I am hearing you rightly, you are saying that there is a set-up cost, and that once the system is up and running, it should be fairly self-operating without too much administrative cost, but that the activity decisions that are taken by HMRC might have a cost to the Scottish budget, and because they would be around enforcement and decisions taken at the time, that would not matter.

That is exactly right. We have tried to capture that in figure 15, which shows the costs of implementation over time against running costs. Looking at that, you can see that implementation costs are now dropping; that is because the system has been put in place and the initial taxpayer identification exercises have been conducted. Based on what we knew at the time and on HMRC’s estimates, it was predicted that, in 2018-19 for example, the overall costs would go down to just over £2 million, with the balance of that shifting into running costs rather than implementation. If there are significant changes, that projection could change.

I understand. Thank you.

If I can just clarify for the public, Mr Kerr, you are an MSP and therefore, according to my flowchart, a Scottish taxpayer, just like Scottish MPs and MEPs. You cannot relocate to Newcastle, although others might intend to do so.

Mr Thorpe, I appreciate the explanation that you gave to Mr Kerr of the potential additional cost. The issue seems to be more to do with monitoring and tracking behavioural change than it is to do with changes in the rates and the bands. Will you clarify whether that is what you meant? The software procurement aspect of this work has probably been the most costly aspect. I think that you mentioned in your paper that about three quarters of the costs were related to information technology. Is the system flexible enough to cope with any changes that might be made to bands, rates and so on?

That would be a good conversation to have with HMRC. I believe that there is capacity to incorporate further bands within the NPS system that was implemented in 2010.

If HMRC wanted to ask you for more money for implementation above what was planned for, it would need to show that there is an actual differential cost. We cannot think of anything of that nature, but it is not impossible that it could come up with something that genuinely was an additional cost. However, given that the systems that it has are quite robust and flexible, we do not think that that is likely.

The committee seems to have spent a huge amount of time in recent years considering IT procurement issues, and Audit Scotland has been very much involved in those considerations. Do you play a similar role in relation to the fitness for purpose of IT systems in the rest of the UK? Does the NAO have oversight with regard to whether the system is capable of delivering what the originator says it is capable of delivering?

We are fortunate enough to spend a lot of time looking at IT. I do not want to take away from the assurance that we are giving you. We are saying that we think that the system should be able to deal with different rate bands.

It should be, but is it?

As far as we can see, it is.

That is correct.

Were you involved in the process at the point at which HMRC failed to identify 420,000 Scottish taxpayers?

We were reviewing the process as auditors, and we saw that a key control point in the system implementation involved properly identifying the Scottish tax base rate. Although I was not directly involved in the earlier reports, I know that it took some time—it was an iterative process and there was some learning during that time. HMRC did a number of things to try to validate that tax base and learned a lot through that process about whose data is correct and who has the most accurate information.

Was the failure to identify 400,000 people an IT issue?

Only in so far as HMRC was using IT processes to support what it was doing. HMRC would take a database from the Post Office or whatever and run it against its own tax records in order to identify differences. However, when it identified differences, it did not know whose records were correct. That was part of the learning process, as investigation was required. There was an element of manual examination.

10:15  

Were you involved in that scrutiny at the time?

Yes, we had access to the whole process.

Who identified the missing 400,000 people? Was it you guys or was it HMRC?

It was not a case of the audit saying, “You’ve got this wrong”; we just became aware that there was an issue. Indeed, I think that we talked to colleagues in Audit Scotland about it, too.

Is the memorandum of understanding between the National Audit Office and Audit Scotland now in place? Are you both satisfied that the arrangements for managing the process are in place?

Yes.

How does it extend to any potential dispute or conflict resolution? What is the process in that respect?

As Sir Amyas Morse has indicated, the memorandum of understanding has been in place for three years now, and from both points of view it is working very well. Working relationships are good, and my team and the C and AG’s teams work closely together. It is all helped by the fact that we take similar approaches to audit—for example, we use the same electronic working papers package.

As for our ability to give you assurances at this stage that what you need is in place, I have said to the committee that, as the remainder of the Scotland Act 2016 provisions come into effect with the devolution of all non-savings, non-dividend income tax and VAT and with the introduction of the new welfare powers, it would be worth reviewing the matter. I know that the two Governments are doing that at the moment. Nevertheless, we are satisfied with the way that things are working just now.

Has the MOU been published? I cannot recall whether it has.

We attached it to the committee papers either last year or the year before, but we can certainly let you have it again. It is on our website and in the public domain.

On the question of dispute resolution, we would all look a bit ridiculous if we were to come before you not agreeing on something, and that is an extremely strong inducement for us to reach agreement on everything. Audit Scotland has to report to you on whether we have done the audit properly, and it would be very unsatisfactory if there were any risk of its saying that it did not think that we had. I do not recollect whether there is a dispute resolution clause in the MOU, but the dynamics of the situation in which we carry out our work are such that it would be inconceivable for us to go forward in those circumstances. We just would not allow such a situation to continue.

The MOU actually contains a clause saying that we would have to sort it out, and you have our assurance that we would do so.

Thank you for that.

Thank you very much for your evidence today—[Interruption.] I am sorry, Colin.

I do not think that Bill Bowman has asked his questions.

Do you have a final question, Bill?

Yes.

On you go.

I have some questions, too, convener.

Okay.

Just for information, I should say that Sir Amyas Morse and I started our accounting training in the same firm here in Edinburgh, 40 years ago. However, our careers have diverged since then and we have ended up somewhere different.

I cannot help but notice, though, that we both look extremely youthful. [Laughter.]

Colin Beattie has a question.

I was going to ask a question, too, convener.

Oh, were you? I thought that you just wanted to make that comment.

I think that someone said that there are something like 2.4 million Scottish taxpayers. Do you actually have to pay tax to be a Scottish taxpayer?

Not necessarily, because we are talking about a potential, not an absolute, number. You do not need me to tell you this, but a self-employed person who had a lot of tax losses and therefore did not have to pay tax, say, would not stop being a Scottish taxpayer.

Someone on a state pension that was covered by their allowances would still be a Scottish taxpayer without paying any tax.

That is right.

Do we know how many people do not really pay tax in cash terms?

I do not know, but we can find that out for you. We have the information, but I do not have it readily to hand.

I would find that interesting.

You have nothing to declare on that basis, Bill. [Laughter.]

I have three quick questions. I was quite concerned to read in paragraph 17 of the summary of the report that

“HMRC does not know how many of the cross-border moves are captured each year.”

Surely that is vital. Surely HMRC’s efforts to compensate by checking that information against other databases must come with a considerable cost.

Yes. We flagged that up because, at the moment, the law does not require people to report to HMRC when they change address. That probably did not matter much in the pre-devolution environment, but it makes quite a big difference in the context of the Scottish rate of income tax. That is not in the law at the moment, so all that HMRC can do—as far as we can see, it is doing this a lot—is say that, on the basis of all the evidence that it has, it is doing its best to identify Scottish taxpayers and is communicating to remind people who might potentially be Scottish taxpayers of their duty to register, encouraging them to do so.

That does not change the fact that, if a person is not obliged to record where they live, there will be a bit of a gap in the system. Over time, it would be helpful to Scotland to have that requirement in place. It is way beyond my remit to say that, but we said what we said because it is relevant to understanding the situation.

There may be compensations. Within the pay-as-you-earn system, in which employers ultimately capture that information, there may be the ability to catch up over time. In other areas, perhaps that would be brilliant. In self-assessment, the mitigations may take longer to kick in.

Paragraph 2.12 is on sample data, which all seems fairly uncertain. The

“2.5% above or below”

HMRC’s

“central estimate of revenue”

is quite a lot of money.

The basic point that we tried to draw attention to is that a number of forecasts and estimates have had to be made in the personal tax model that HMRC uses. We have suggested that, as more information becomes available—as we went through the identification exercise, we got better information in the pay-as-you-earn system through the flagging—that will be an invitation to look at whether there are better and more resilient data sources to support the forecasting exercise. We are getting into fiscal issues in Scotland, which are issues for other people, not the NAO, but those forecasts are important because they support quite significant decisions. Having got better information out of the pay-as-you-earn system, the question is whether that will support a better forecasting approach. We do not know that.

Will the possible changes that might come as a result of the coming budget make things more complex or change the way in which sampling is done and the estimates that we are talking about?

We have not spoken with HMRC specifically about the coming budget changes and how they will play into things.

Going back to my first point, as the data improves, there will be an opportunity to look at whether the forecasting can be improved by drawing on the new information.

Is that an area for the committee to keep pushing forward on? There are a lot of developments in information technology, big data and all that sort of stuff these days, and that might help the committee to get a clearer view of a lot of these things in the not-too-distant future.

I will keep talking to HMRC and asking it where we are going. Models are not perfect as a method of predicting. It is not evil that they are not perfect; that is just inherent in modelling. As a predictor, a model is not 100 per cent accurate, but the model that we have at the moment is quite accurate.

Paragraph 3.41 focuses on pension providers. I know that the matter has been discussed before, but I found it astonishing that paragraph 3.44 says:

“There is no definitive list of pension providers”.

Surely pension funds are regulated and you can just ask the regulator for a list.

I cannot really answer that question. It is a good question. We drew attention to the fact that, for the tax system to work effectively for people, there must be good co-ordination between HMRC and the pension providers. A number of steps that we tried to draw out in the report are being taken to improve that, certainly from a digital perspective. When we inquired about who the members of that population are, we did not get a clear answer, so we might need to come back to that.

A huge number of pensioners must receive pensions from companies that are based in England.

Yes.

However, we do not have that figure. Your report says that

“pension providers do not necessarily know whether their members are Scottish taxpayers.”

That is quite an important issue, which we will continue to pursue with HMRC.

Is it a real problem or is it just an apparent problem?

It is difficult for me to answer that question. The pension provider issue is probably more of a peripheral one in terms of the fiscal impact, but it does impact on individuals. How relief at source works and is implemented could bear on the individual.

There might be quite a lot of unhappy people who do not get pension tax relief at the point at which they receive their pension. To repeat John Thorpe’s point, it is not necessarily a matter that will hurt the Scottish exchequer, but it is a matter on which there might be a great deal of noisy complaint from people who do not get the right level of tax relief initially.

I presume that many pensions will not push people into different tax bands because, by nature, many people’s pensions tend to be quite low. I presume that the pension of someone who works for a company such as BT will be paid out of London. Are we saying that such companies cannot necessarily identify whether the people who are paid the pension are Scottish taxpayers? That is my reading of what the report says. Am I misinterpreting it?

We do not know the answer to that. I am not being simplistic. That is a question for HMRC to answer, and we are not clear that it can answer it yet.

I have a wee point of clarification. I think that the issue relates to tax relief on pension contributions rather than tax relief when people receive their pension payments. As the C and AG said, there is a risk that they will not receive the full relief when they make their contributions. That will be sorted out later, but the issue does not affect pension payments that are made to people once they have retired and started drawing their pensions.

So, we can identify the residency of people who are being paid pensions. That is not at issue.

Absolutely—we can do that as part of the identification of Scottish taxpayers.

We will need to discuss our communication with HMRC on some of the issues that have come up today. I thank the witnesses very much for their evidence and for coming to our meeting.

We have agreed to take today’s work programme discussion in private. I seek members’ agreement to take next week’s work programme discussion in private, too. Is that agreed?

Members indicated agreement.

That means that next week’s meeting of the Public Audit and Post-legislative Scrutiny Committee will be held entirely in private.

10:28 Meeting continued in private until 11:22.